Element Markets Sells City of Houston Emission Credits: Price to Pollute Hits Record High

June 19, 2013

Economic growth remains slow by historical standards, and millions of Americans still are looking for work. But the pollution business is booming in Houston.

The price to pollute is at a record high, with traders recently paying $270,000 for the right to emit 1 ton of volatile organic compounds, a key ingredient in ozone, or smog. That’s up from $4,500 per ton in January 2011.

The soaring price of smog credits – each equal to 1 ton of pollution – means the market is doing its job: prodding industry to reduce emissions. The allowances have become so valuable that for the first time since the system began nearly a decade ago, companies are looking for ways to cut emissions in order to sell their excess credits as a bottom-line booster, traders said.

“As the market price has significantly increased over the past two years, it has sent signals to companies to make reductions in emissions” of volatile organic compounds, said Mike Taylor, who manages the emissions trading desk at Houston-based Element Markets. The brokerage firm assisted the city of Houston in the record sale, which was reported last week to Texas regulators.

The market for these state-issued allowances, officially called Emission Reduction Credits, appears to be driven by chemical makers, who are looking to expand in the Houston area after years in the doldrums.

Violating federal limits

The eight-county region is in violation of federal smog limits. So to build or expand a large industrial facility here, companies must obtain credits for their projected emissions of volatile organic compounds and nitrogen oxides. The chemicals, when cooked in sunlight, form ozone, a harmful pollutant linked to lung damage, asthma episodes and death.

The credits come from companies which have reduced emissions below permitted levels, either by using cleaner-burning fuels, upgrading pollution controls or completely shutting down plants.

With each trade, a number of credits are retired, a requirement designed to lower the cap of allowable emissions. Houston’s air quality has improved since the system began because in part industry has retired credits for about 450 tons a year of volatile organic compounds, according to the Texas Commission on Environmental Quality.

“The program has been positive,” said Neil Carman, an air quality expert with the Sierra Club’s Lone Star chapter. “It gives an incentive to a company or in this case, a city, to reduce emissions, and it still allows some expansion.”

The record sale involved the city of Houston, which had 14.3 credits for volatile organic compounds to sell after upgrading equipment at its Almeda Sims sewage treatment plant. The city also sold credits for 12.4 tons of nitrogen oxides, another ingredient in ozone, for $151,000 per ton.

The city may use the $5.7 million payday to reduce energy costs at its wastewater treatment plants, said Janice Evans, spokeswoman for Mayor Annise Parker.

“Obviously, we are very pleased with the outcome,” she said, “but we don’t exactly know the reason why other than the market is really good right now.”

Traders worry

Despite the bull market, traders are worried about liquidity – the ease with which the allowances can be traded. There are so few available credits in greater Houston that NRG Energy has asked regulators to let it buy some from the Dallas-Fort Worth area to cancel out emissions of volatile organic compounds at its coal-fired power plant in Fort Bend County. The state environmental quality commission, however, has not allowed trades that are not in the same region.

The Houston area had an ample supply of credits for volatile organic compounds as recently as 2011, when prices were as low as $4,500 per ton.

The market run began as Chevron Phillips Chemical Co., Celanese Corp. and other chemical makers started making plans to expand because of cheap and abundant natural gas.

What’s more, the credits will become even more scarce if the federal government, as expected, introduces stricter smog limits in the next two years.

“Companies will be looking wherever they can for credits,” said Larry Soward, a former state environmental commissioner who now works as a consultant. “They will only become more valuable.”

How the credit system works

A company generates credits by voluntarily making permanent reductions in smog-forming emissions beyond all applicable regulations.

The Texas Commission on Environmental Quality certifies the credits – each one equals 1 ton of pollution.

The credits can be used by the company to cancel out emissions at new or expanded facilities or to sell them to others who looking to build or expand.

Each trade requires 30 percent of the credits to be retired, thus lowering the emissions ceiling in the region and reducing air pollution.